Did You Know? The S&P 500 Index Is No Longer the Same

Ten years ago, the top 10 companies in the S&P 500 made up just 18% of the index. Today, that figure has soared near to 40%. The original intent of investing in the S&P 500 was to pursue market-average returns while diversifying risk across 500 companies. However, with the top 10 companies now commanding such a large portion of the index, your investment is increasingly a bet on a handful of corporate giants.

Much like the rich getting richer, the gap between the top 10 companies and the remaining 490 is likely to widen further. This is a defining characteristic of market-cap-weighted indices. While this isn’t necessarily a downside, it does have its unique advantages.

Will the S&P 500 Pull Back Next Year?
After two consecutive years of significant growth, many are wondering if the S&P 500 will see a correction next year. Historically, the index delivers an annual return of about 10%. Yet, over the past two years, it has posted remarkable gains: over 20% last year and nearly 30% this year. Does this mean a "mean reversion" is due, bringing returns back in line with the long-term average?

Given the current trends, I personally believe a pullback is unlikely, barring unforeseen black swan events. In fact, the S&P 500 might sustain or even exceed its recent performance. Past performance doesn’t dictate future results, especially as the dynamics of the S&P 500 have fundamentally changed.

This year’s growth can largely be attributed to the dominance of big tech, driven by AI—a topic that’s been talked about endlessly but continues to shape market trends.

Don’t Doubt It—AI Is Just Getting Started
While there are emerging voices questioning the growth of AI, I firmly believe we’re still in its infancy. Financial reports from major tech companies already show how AI is delivering cost reductions and efficiency gains. However, because AI is still in its early development stages, significant investments are required. Only well-capitalized tech giants can reap the early benefits, a trend that will likely persist into next year.

Take ChatGPT as an example. The release of its latest version, GPT-4.5-turbo, demonstrates the rapid advancements in language models—an innovation in software. Meanwhile, Tesla is applying AI in the physical world, such as in autonomous driving and robotics. These aren’t feats any ordinary company can achieve, widening the gap between tech giants and the rest.

It’s clear that big tech will continue leading the AI revolution, making it a critical growth engine for the S&P 500 over the coming years.

Trump’s New Policies: Deregulation and Support for Innovation
Another factor to watch is the new administration under President Trump. The Trump government has emphasized reducing government intervention, and loosening regulations on the AI industry could be a major market catalyst in the coming years.

Traditionally, AI development has been constrained by concerns over privacy, data security, and ethical guidelines. While these regulations are necessary, they also slow down the adoption of new technologies. A more relaxed regulatory environment could enable companies to allocate more resources to cutting-edge R&D. For well-funded tech giants, this represents a significant advantage, potentially solidifying the U.S.’s global leadership in AI.

Moreover, Trump’s policies are expected to extend tax cuts, especially for innovative and high-tech industries. Lowering corporate taxes for these sectors would directly reduce operating costs and significantly boost capital returns. This could free up more funds for R&D and market expansion, allowing U.S. companies to rapidly commercialize new technologies and set global standards.

So, What’s in Store for the S&P 500 Next Year?
While no one can predict black swan events, investors should always remain flexible and prepared for unexpected scenarios. Ensuring your portfolio is well-diversified and resilient will allow you to navigate any market environment with confidence.